Controversial real estate transfer fee has supporters
WASHINGTON — How about this for a new and ingenious real estate money machine: Every time a house sells during the next 99 years, 1 percent of the price goes back to the original developer or is shared among investor partners.
The levy won't be subject to haggling between future buyers and sellers, either. That's because it's a covenanted mandate called a private transfer fee. It's not a government transfer tax. Nor is it a home-owner association or environmental protection covenant. It's a private requirement that runs with the land. If a seller refuses to pay it to a third-party trustee at closing, the sale won't proceed.
Sounds like a great deal if you're on the collecting end. Apparently the idea has been attractive enough that substantial numbers of developers and builders are signing up with a New York company that has devised a "patent-pending" system to tap into real estate transactions well into the next century.
Manhattan-based Freehold Capital Partners declines to identify clients or participants in its private transfer fee program, but claims on its Web site that as of late 2009, "the owners of an estimated $488 billion in real estate projects nationwide, including some of the country's largest, most well-respected companies, have partnered with Freehold."
The company says it is negotiating with institutional investors to "securitize" pools of transfer fees, essentially creating bonds based on future cash flows that can be sold to money managers.
Freehold's activities have stoked legislative controversies, and real estate trade groups that oppose the private fee concept plan to fight it.
The National Association of Realtors and the American Land Title Association, for example, are asking members to persuade legislators to prohibit or limit the use of investor-oriented private transfer fee programs. Even the National Association of Home Builders, some of whose members reportedly have signed up to offer transfer fees, isn't convinced the idea is sound.
"It's a very creative concept," said David Ledford, NAHB senior vice president for housing finance, "but it's largely untested and controversial politically."
Freehold maintains that its transfer fee covenants are good for buyers and builders. Spokesman Curtis Campbell said in an e-mail that "private transfer fees represent an adaptation in how to pay for development costs" incurred by builders "at a time when funding is not available" to them on "reasonable terms."
Freehold's system allows developers and builders to recoup some of their "infrastructure costs" without lumping them onto the price paid by the first purchasers of a house.
By creating future revenue streams, which builders can "monetize" upfront by selling to investors for cash, developers can sell houses for lower prices than they otherwise could, Campbell said.
Critics say the program will taint houses encumbered with transfer fees for decades, lowering their values and making them harder to sell. Real estate attorney Robert A. Franco of Ohio says the concept is also certain to lead to litigation, since many buyers may not be aware of the fees. Future buyers may also challenge the legal validity of the fees in court, balk at settlements and jeopardize sales, he said.
According to the American Land Title Association, six states have limited or restricted private transfer fees: Florida, Kansas, Oregon and Missouri, which ban them; California, which requires upfront disclosures; and Texas, which prohibits them in certain circumstances.
A Utah developer who signed up with the program but has since withdrawn says the underlying purpose is worthwhile. Nate Shipp, managing partner of Development Associates Inc., said many builders and developers would like to be able to receive compensation for some of the upfront costs they bear in creating a new community.
But DAI pulled off the covenants attached to recent home sales, he said, in part because they bothered some purchasers and because DAI never received anything in exchange. One of DAI's home buyers, Camber Keiser of Eagle Mountain, Utah, said the fee was not disclosed at the time of purchase, "so yes, we were surprised to learn of it."
To make sure you aren't caught in a similar situation, ask before you buy.
Ken Harney can be reached at email@example.com.